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Affordability, incentives driving Abu Dhabi real estate

ABU DHABI, December 13, 2017

Prolonged economic headwinds have meant that Abu Dhabi’s real estate market has continued to stagnate during 2017, with the majority of sale and lease activity driven by affordability and incentives being offered by landlords and developers, according to leading international real estate consultants Cluttons.

The rental market has been relatively more buoyant than the sales market, with higher levels of activity compared to this time last year, stated Cluttons in its Winter 2017/18 Abu Dhabi Property Market Outlook report.

A lot of demand stems from households relocating to make savings and to take advantage of incentives being offered by landlords, said the report.

These include the accepting of rental payments through multiple cheques, as well as a growing number of landlords who are willing to pay agency fees, which is often up to 5 per cent of the annual agreed rent, it added.

Faisal Durrani, the head of research at Cluttons, said: "The nervousness we have been reporting on for almost three years is well entrenched in the market at present. Weaker economic growth has taken a toll on the hydrocarbon sector in particular, which has been a key driver of demand in the residential and commercial markets in the emirate historically."

“Saying that, we are seeing some positives emerge that may help to boost economic growth, including the recent announcement by Adnoc to invest $109 billion in its gas downstream growth strategy over the next 5 years," remarked Durrani.

"This will likely filter through to the UAE capital’s real estate market in the form of fresh demand for residential and commercial property," he pointed out.

"However, in the short term we anticipate that both tenants and buyers will continue to err on the side of caution and activity will continue to be driven by affordability and favourable payment terms offered by landlords and developers," he added.

Edward Carnegy, the head of Cluttons Abu Dhabi, said: "With household finances under pressure due to a reduction in housing allowances, the removal of various subsidies and the impending introduction of VAT in January 2018, tenants are focused on value for money, as well as quality."

For now, Cluttons says, the rate of decline in rents across the city’s residential investment areas slowed to -1.8 per cent in the third quarter, from -3.6% in the previous quarter. The annual rate of change has however slipped further to -11.8 per cent.

In the sales market, Cluttons’ report indicates that residential capital values across Abu Dhabi’s freehold investment areas declined by 0.4 per cent in the three months to the end of September, leaving them just shy of Dh1,150 per sq ft, a level not seen since early 2014. Overall, house prices are now 4.1 per cent below where they were at the same time last year.

"Due to the sustained drop in demand, we have seen developers respond by offering attractive payment plans. Water’s Edge by Aldar, for instance, has been a runaway success, with the Yas Island scheme netting the developer some Dh800 million through off plan sales of all units," stated Carnegy.

Cluttons previously forecasted rents to end 2017 8 to 10 per cent down on 2016 across Abu Dhabi’s freehold residential investment areas.

"Given the range of complex factors hindering the market’s ability to turn around, rents are now expected to end the year 10 to 12 per cent lower than the end of 2016. Next year is likely to see rents slipping further in the region of 5 to 7 per cent, unless there is a notable rebounding in economic growth, which would have to be underpinned by a turnaround in oil prices, which appears unlikely at this stage," added Durrani.

Similar to the residential market, subdued growth in the oil and gas sector continues to undermine overall activity in the office market.

The public sector on the other hand, which includes government departments and other quasi government entities, appears to be mobilising in response to the weak rents, with a range of requirements in the market.
While some are looking to consolidate, others are attempting to upgrade from older offices.

"We are seeing fairly significant churn from public sector and related entities, with at least 50,000 sq m requirements currently in the market. This is attributable to various drivers including consolidation exercises, upgrading offices from older legacy locations and the availability of new office supply to enable such relocations," stated Carnegy.

"These factors are all framed by a requirement to cut cost and drive efficiency. Similarly, corporate occupiers are still consolidating, cost cutting and requiring increased lease flexibility," he added.  

Cluttons’ report also highlights the reduction of headline rents across the city. Even the top-tier Grade A buildings have seen rents weaken, with the Aldar HQ building (-2.8%) and International Tower (-3%), for instance, both registering falls in headline rents in Q3.

Still, over the last five years, prime office rents have declined by just 5.4 per cent to Dh1,750 per sq m, shielded by the relatively small number of Grade A office buildings. Secondary rents have fallen by a sharper 39.3 per cent over the same period, to Dh850 per sq m.

Overall, Cluttons expects office rents to remain under pressure across Abu Dhabi during 2017 and 2018.

"Prime office rents appear to be on track to end the year roughly 5 to 10 per cent down on this time last year and it is our view that a similar pattern is likely during 2018. The key to unlocking the current stalemate will be a turn-around in oil price growth and perhaps an easing of the cost containment measures introduced by the Government in the wake of the oil price collapse in 2014," stated Durrani.

"Both of course are unlikely at this stage and so our expectation is for ‘more of the same’, with occupiers likely to continue capitalising on weak rents by relocating and consolidating operations where possible," he added.-TradeArabia News Service




Tags: abu dhabi | real estate | Cluttons | affordability |

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